Established in $2022,$ Flex Star provides premium packaging soluons ulizing cung$-$edgeequipment, advanced processes, and rigorous quality control measures. Their vercally integratedmanufacturing environment offers comprehensive engineering services, prepress and graphicscapabilies, premium blown film producon, high$-$resoluon prinng, solventless laminaon,precise sling, and state$-$of$-$the$-$art conversion equipment. Alex Korosky is the CEO of Flex Star; heconvened a management meeng to discuss the financial performance of Flex Star along with theexpansion plan that he has in mind. Alex led the meeng with his execuve team and ensured thepressing important topics were discussed.The sales manager started the meeng with credit risk management. According to the salesmanager, Flex Star has an excellent credit$-$establishing process, a structured system for trackingcredit periods which need to be established. Each credit applicaon process starts with the salesmanager requesng a credit applicaon to be filled out by the customer, which the sales managerthen approves for the credit limit request. The customers applicaon is then forwarded to theaccounng team so it can set up the customer's account. At first glance, Alex believes this to be agood process but is wondering if improvements can be made and how progress might be measuredby the execuve team.Being a manufacturing plant, Flex Star is quite concerned about direct labour costs, as they make upa major part of the cost of inventory. The recent union negoaon has caught Alexs atenon, andaer consulng with the HR manager, he has come to the realizaon that direct labour rate for hisplant workers, along with the supervisor salaries, will soon be increased by $10\%.$ As many of thefirms sales contracts will be coming due in two months $($with the rate increases kicking in at aboutthe same me$),$ it is important for the execuve team to come up with a strategic plan to managethis increase.As the labour cost conversaon connued, the bill of the material topic was also brought up$.$ Alexshowed the execuve team Flex Stars typical bill$-$of$-$materials statement and outwardly wondered ifthere is any area, they should focus on to improve its cost. Packaging is a compeve industry, so therace of quality and pricing has always been crical in contribung to Flex Stars success. Below is aBOL to produce $1000$ bags, with margin of $2024$ reduced quite significantly due to unchangedpricing, an analysis needs to be done in order to help Flex Star achieve a $20\%$ margin future goingforward, assuming cost of $2024$ will stay constant unl the end of fiscal year $2024.$Component Qty consume $2023$ Total Value consumed $2023$ Qty consume $2024$ Total Value consumed $2024$Testing $540$$ $650$$Resins $1501,200$$ $1681,512$$Pallet cover $2071,242$$ $2321,391$$Cores $1050$$ $1156$$Manufacturing Overhead $5104,590$$ $5715,712$$Labour Cost $1851,850$$ $2072,279$$Flex Star's bag$-$making division specializes in manufacturing plasc components for the small petfood market. These components are produced in high$-$volume runs, with equipment oen operangaround the clock for consecuve days to maintain producon consistency. Addionally, the divisionfulfills low$-$volume orders with unique specificaons. One of the machines in this departmentrequires replacement. Currently valued at CAD $$13,000,$ the machine must be replaced due toupcoming safety regulaons. This machine produces Flat botom bags of which incur fixed costs,including depreciaon, the relevant details of which are as follows:Flat botom bag $($A$)$Sales CAD $$100000$Cost of salesVariable costs $82000$Fixed costs $1500097000$Annual profit $$3000$Note that: All the fixed costs $($including depreciation$)$ are directly related to the production of Flatbottom bag.Projecons indicate that current revenue and costs will increase $10\%$ each year for the next fiveyears, aligning with the expected lifespan of the new machine under review. Introducing this newmachine would reduce variable costs by CAD $$8,000$ for A$.$ Acquision and installaon costs for thenew machine are esmated at CAD $$100,000,$ with a $$10,000$ residual value aer five years.Company policy dictates straight$-$line depreciaon for such machinery, with a cost of capital set at $10$percent. Alex wanted to invest in this machine but was not certain about the best approach toevaluate this investment.As a proacve CEO, Alex has been researching the plasc industry and came across significantinformaon. Notably, in $2021,$ the Canadian government unveiled an ambious iniave aimed ateliminang Canada's plasc waste enrely by $2030($PMO$,2021).$ This iniave, known as ZeroPlasc Waste $2030($ZPW$2030),$ underscores the escalang global concerns surrounding theenvironmental repercussions associated with plasc producon, ulizaon, and disposal.The primary objecve of the ZPW$2030$ policy is not only to halt the release of plasc waste into theenvironment but also to cease the pracce of disposing of plasc waste in tradional landfills, alongstanding pracce in Canada. Recognizing the implicaons for his company operang in theplasc packaging sector, Alex understands the importance of devising innovave strategies tominimize waste and align with this pivotal policy.FINANCIAL SITUATION OF FLEX STAR PLASTIC AND EXPANSION PLANA part$-$me accountant$-$maintained Flex Star's financial records. The accountant kept dailyaccounng records, including vouching, cash maintenance, receipts, and payments for the company,and prepared monthly, quarterly, and annual financial statements as per statutory requirements.Flex Stars financial statements were audited by a CPA. The business generated profits aer all theexpenses and interest payments, so Alex was happy and always felt like a successful entrepreneur.Aer his research of the market expansion to consumer packaging, he thinks that there is anexcellent opportunity for Flex Star to grow. He believes that his business is in a solid financialposion compared to industry standards, with posive net income year over year and a strong cashflow year over year. Alex asked if you would help him by looking at these financials and, perhaps,analyzing any trends you see from the balance sheet and income statement. He looks for areas ofimprovement, if any.As the business grows, Flex Star needs to increase its capital for future raw material purchases andto expand its storage space for the manufacturing expansion plan. Alex's credibility in the marketwas good, so he had no problem procuring the necessary raw materials. However, with theexpansion plan, Flex Star urgently needs a long$-$term soluon to meet the business's cash andinvestment requirements. Alex is quite confident with his financial results and firmly believes thatthe bank will give him a loan of $$5$ million dollars based on his current financial performance. Butthere might be other alternaves with pros and cons to secure funding that might benefit thebusiness he wished to explore.Balance Sheet $202220232024$AssetsFixed assets $($net of depreciation$)2,3753,1255,875$Cash and cash equivalents $50125133$Accounts receivable $3751,8752,625$Inventories $4001,8752,813$Total $3,2007,00011,445$Equity & LiabilitiesEquity share capital $$10$ each $1,5002,0002,500$Reserve & surplus $4551,2952,345$Long$-$term borrowings $9201,5453,125$Current liabilities $3252,1603,475$Total $3,2007,00011,445$Income Statement $202220232024$Sales $2,5006,00010,000$Cost of goods sold $1,5503,5406,000$Gross profit $9502,4604,000$Operating expenses:SG&A $100562\mathrm{.}51250$Depreciation $125500825$Interest expenses $($onborrowings$)75197\mathrm{.}5425$Profit before tax $($PBT$)6501,2001,500$Ratio IndustryAverageAcid test ratio $($quick ratio$)1\mathrm{.}30$:$1$Current asset turnover ratio $3$Current ratio $2\mathrm{.}10$:$1$Debt$-$to$-$equity ratio $35\%$Fixed asset turnover ratio $2$Gross profit ratio $40\%$Interest coverage ratio $($times$)11$Inventory days $65$ daysInventory turnover ratio $5\mathrm{.}6$ timesLong$-$term debt to total debt $23\%$Net profit ratio $20\%$Receivable days $43$Return on equity $25\%$Return on fixed assets $28\%$Return on total assets $10\%$Total asset turnover ratio $1\mathrm{.}1$Working capital turnover ratio $9$Flex Star also has a division that makes and sells garbage bags, Alex was not happy with the result ofthat business unit and is thinking about eliminang it$.$ The net loss of $$41,000$ over a sale of $$675$Khas been bothering Alex. He has three sales representatives in for this product line and has apricelist that is shared among sales team, he leaves it to the sales team lead to monitor the price.His sales teams are paid commission based on the calculated sales of units and standard price thatcompany has determined, not on GP$.$ The reason Alex does this is because he wants to give the salesteam the freedom to negotiate prices, he is not sure how effective it can be and asks for youranalysis and recommendation. How would this impact on his upcoming budget and what would bethe accounting treatment if he gets rid of this business unit.Actual$-$ Garbage bags Unit Original BudgetSold units $2100019000$Sales $ $675,000$ $ $786,000$Materials $ $(360,000)$ $ $(320,000)$Labour $ $(305,000)$ $ $(307,900)$CM $ $10,000$ $ $158,100$Fixed Costs $ $(51,000)$ $ $(42,000)$Net Profit $($loss$)$ $ $(41,000)$ $ $116,100$Join Alex as his trusted business consultant to navigate through exisng business challenges andexplore strategies for capital asset acquision. Provide recommendaon for issues that youidenfy from his business.find the issue of evaluating the garbage bags business unit and do a qualitative and quantitative analysis with the pros, cons and recommendations.